Investors fled Twitter’s (TWTR) stock in droves after their knight in shining armor, Elon Musk, ended his courtship of the company. Twitter shares fell by more than 11% in response, to below the level they were trading before Musk set the wheels in motion for a deal in April. He started scooping up shares of the company Jack Dorsey co-founded in early 2022.
Twitter’s stock also had the dubious distinction of being the single worst performer in the S&P 500 index on Monday. As of Friday, the stock recovered to $37, slightly above where it was trading before Musk backpedaled on the deal.
Source: Yahoo Finance
In addition to Twitter’s stock, the bottom fell out in the broader tech sector to start the week. With the second-quarter earnings season right around the quarter, investors are skittish about how inflation is impacting profits in corporate America.
Twitter Legal Battle
Musk revealed in an SEC filing on July 8 his intentions to cancel his planned $44 billion takeover of the social media platform, bringing months of negotiations between the two parties to a screeching halt and allowing the deal’s critics to take a victory lap. Investors do not tend to like uncertainty and fled TWTR shares as speculation about a legal battle between Twitter and Musk emerged.
Musk had intended to purchase Twitter as part of a consortium of buyers and bring the company to the private market. The Tesla chief said the dealbreaker was the fact that Twitter failed to disclose more details about the number of bot or spam accounts on the platform, which Musk said he needed to properly value the company.
Brian Fitzgerald, a senior equity analyst at Wells Fargo, reportedly said it was not about the bots but instead the Musk consortium angling for a better price tag on the deal.
Since April, when this ping-pong match between Musk and Twitter’s management team heated up, the TWTR share price has sunk roughly 40%. If a legal battle between Twitter and Musk materializes, it might not be just Twitter shareholders who are punished. Twitter is likely to play hardball with Musk, as evidenced by the company’s attorneys characterizing Musk’s decision to abandon ship as “invalid and wrong.”
According to CNBC, Musk’s abrupt departure from the Twitter deal could even land him in jail, which would not be good for the other companies the billionaire runs, including Tesla. The business network’s David Faber spelled it out, saying that Twitter’s board would not be satisfied with a $1 billion breakup fee and could attempt to make Musk buy the company anyway.
If Musk refuses, a Delaware court could have the right to give him jail time. A post by The New York Times points followers to its article, which explains bluntly: “Twitter is in a good position to sue under a legal doctrine called specific performance, which allows courts to force a transaction to be completed, even if one of the parties wants out.”
Investors take notice of that sort of thing, as evidenced by the cacophony of tweets on the topic. Stock pro Jim Cramer, host of CNBC’s Mad Money, for example, seemed surprised by the possibility of such potential punishment, pointedly asking, “Jail!?” on his Twitter account Monday immediately after retweeting the NYT tweet.
Jail!?
— Jim Cramer (@jimcramer) July 11, 2022
Tesla investors must have been listening because TSLA shares fell nearly 7% to start the week and continued to trade in the red in pre-market trading on Tuesday. Since mid-April, when Musk first announced his intentions to buy Twitter, Tesla shares have shaved nearly 30% off their value.
If Musk decides to stir the pot and launch his own social media platform, TWTR shares could be in for more pain. For the year so far, Twitter’s stock has lost more than 20% of its value.